Revenue increased by 4.1% and adjusted operating income before depreciation and amortization rose a healthy 8.9% at Mediacom Communications in Q1, driven by continued gains in its broadband service and steadily declining capital expenditures.

Mediacom ended the quarter with revenue of $497.9 million and AOIBDA of $195.5 million. The mid-sized cable operator added 24,000 high-speed internet customers in the period, up from 19,000 additions in the prior year. Video customers declined by 12,000 in the period, three times the 4,000 customers it lost in Q1 2018.

Capital expenditures dipped 8.9% to $72.7 million from $79.8 million in the prior year. Free cash flow was up 31.5% to $98.2 million from $74.7 million in Q1 2018.

Cable operators have a few years left of continued increased capital spending, but advances in customer equipment coupled with increasingly intelligent and high-capacity networks could drive spending down substantially.

Overall capital spending as a percentage of revenue could drop from its current level of about 15% of total revenue to 10% in the next five years, according to a report by U.K.-based New Street Research.

On average, New Street estimates that capex per home passed could fall from its current level of about $140 to around $120 per home passed. And that’s after some operators — Altice USA and Charter Communications — complete ambitious network upgrades aimed at increasing data speeds and improving efficiencies.

FTTH Buildout
Altice USA is well underway with its “Generation Gigaspeed” project to bring fiber directly to the home. The upgrade is expected to take five years, and the company recently said it is on track to reach 1 million homes with fiber by the end of 2018.

While Altice is expected to see capex rise slightly in the next few years as it goes through that project — Morgan Stanley media analyst Ben Swinburne estimated it would spend an additional $3 billion over the next five to six years on Gigaspeed — other operators will see their capital commitments shrink.

That freed up cash could be used to bolster other parts of the business, introduce new products or simply be returned to shareholders in the form of stock buybacks and dividends.

Pivotal Research Group CEO and senior media and communications analyst Jeff Wlodarczak said he believes how the extra money is used depends on the operator. For Charter, he sees most of that capital being reallocated to stock buybacks. In Comcast’s case, it could possibly go toward M&A; and for Altice USA, debt retirement and M&A.

“Eventually, after a couple years of decline, I think that all starts moving in the direction of Altice USA, to [fiber-to-the-home] where demand warrants,” Wlodarczak said.

Not everyone is convinced that capex is on the way down though. Moody’s Investor’s Service senior vice president Neil Begley said in an email message that while smaller operators may see some declines, the larger players will stay at or around current levels.

“I think that video product development and wireless spending will keep capex high for the large players,” Begley said. “But for the smaller players, since they do not possess the scale to develop their own software and hardware applications, and are unlikely to spend much on wireless other than to extend some fiber, there is a good chance for capex to decline to maintenance levels and commercial extensions of fiber.”

Capital expenditures have been up and down for cable operators over the years, especially as MSOs have embarked on new product and service initiatives.

Comcast, which began the national launch of its X1 platform in 2012, saw its capital spending rise sharply as it deployed new boxes and beefed up infrastructure across its markets. Capex for the company, which had normally risen by about $100 million per year prior to 2012, began to rise by about $500 million annually after that date. But that spending is expected to decline beginning this year, from $7.6 billion in 2016 to $7.02 billion in 2017 and to $6.8 billion by 2018, according to MoffettNathanson principal and senior analyst Craig Moffett.

Similar capex reductions are expected at other cable operators.

Longer CPE Life
Cable companies are approaching the end of the most recent upgrade cycle, according to the New Street Research report, written by analysts Frank Knowles and Andrew Entwistle.

What’s different this time is that new CPE in the form of set-tops and WiFi router equipment can be upgraded remotely, which should extend the life of the equipment substantially.

With the increasing trend of placing storage and functionality in the cloud, the era of the bulky set-top box also could be coming nearer to a close. New Street predicted that, long term, the typical set-top box will essentially be a dongle with IP access and encryption but with storage and intelligence housed in the cloud.

“We can see an end in sight for the expensive set-top box as storage and functionality move to the cloud, but offsetting this from a capex perspective is the increasing cost of solving customers’ in-home networking problems,” Knowles and Entwistle wrote. They added that additional costs for WiFi equipment, like home network hubs, could be offset in the short term by charging more for the service and in the long-term through reduced churn and better customer satisfaction.

Cox Communications is already doing this with its Panoramic WiFi product, a whole-home WiFi solution that costs about $9.99 per month. Comcast’s xFi product, a cloud-based home WiFi management platform, became available to existing customers in May at no additional charge.

New Street estimated that CPE costs per customer were fairly stable between 2012 and 2015 at about $100 per customer, but have fallen sharply in recent years, to under $80 per customer by the second quarter of this year.

Costs vary among operators – Comcast is deploying more expensive X1 boxes while operators like Cable One have de-emphasized video. But New Street expects CPE reductions alone to result in a 15% savings in overall capex per home passed from nearly $140 to $120.

“We think that core network spend can reduce as networks are modernized and virtualized, leading to savings in equipment maintenance and in space/power,” the analysts wrote.

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Mediacom Communications said it will invest $1 billion over the next three years for a number of projects, including “Project Gigabit,” an upgrade and expansion initiative that will bring 1-Gig broadband to “virtually all” of the 3 million homes and businesses in the MSO’s footprint, which covers about 1,500 communities in 22 states.

Mediacom announced the capital investment to mark the company’s 20th anniversary – see this Q&A with Mediacom founder and CEO Rocco Commisso (subscription required) for more about the history of the company and what’s on the horizon for the New York-based MSO.

The company said Project Gigabit will build upon the residential gigabit product launches completed by Mediacom in 2015 and the Gigabit+ Fiber Solutions service currently offered by Mediacom Business today. Mediacom said it expects to bring the first wave of Project Gigabit communities online as early as the fourth quarter of 2016.

Mediacom said its $1 billion capital investment plan will fund other key initiatives, including the expansion of the Mediacom Business’s network inside downtown areas and commercial districts; the extension of Mediacom’s deep-fiber residential video, Internet and phone network in order to pass at least an additional 50,000 homes; and the deployment of community WiFi access points throughout high-traffic commercial and public areas across Mediacom’s national footprint.

“From the time we acquired our first cable system in March 1996, Mediacom’s focus has always been to offer the smaller communities we serve the same communications and video services that are available in America’s largest cities,” said Commisso, in a statement. “Project Gigabit will allow us to go even further by giving our customers access to one of the fastest broadband networks in the world.

“The $4.2 billion in private capital invested by Mediacom over the last 20 years has allowed us to, among other things, create an all-digital video network, launch a variety of advanced broadband services and deploy nearly 600,000 strand miles of fiber,” he added. Commisso. “We decided to accelerate our capital spending over the next 3 years because our Company wants to be the engine that drives economic growth and development for businesses and residents in the communities we serve.”

There’s some good news and bad news in store for telecom suppliers in 2016 – capex spending by U.S. carriers is expected to rise, but not by much.

“For 2016, our forecast call for annual U.S capex spending growing 3% year-over-year, with Telcos (wireline + wireless) up 2%, Cable TV up 1% and Web Scale expenditures up 6%,” Raymond James analyst Simon Leopold forecasted in a research note issued last week.

This year looks a bit more challenging outside the U.S., amid anticipated weaker spending from China (down 11%) and Europe (down 7%).

“We think that U.S. telcos will continue to focus on expanding wireless capacity, as evidenced by the premiums paid for Advanced Wireless Services (AWS) spectrum,” he noted.

As for the cable vertical, “the advent of DOCSIS 3.1, and the industry trend towards embracing hybrid architectures with the ultimate goal of transitioning to an all IP video distribution could increase capex allocations to networking,” Leopold said.

Operators such as Comcast and Liberty Global are expected to be among the early-movers with DOCSIS 3.1 following last week’s CableLabs certifications of D3.1 models from five suppliers – Askey Computer, Castlenet, Netgear, Technicolor and Ubee Interactive. 

Leopold also served up his top picks for 2016: Cisco Systems (thanks in part to its diversified portfolio, strong balance sheet and cash-generating ability); Arris (despite a “misperception regarding changes to video services”); and Applied Optoelectronics (“offers the highest potential reward for risk tolerant investors).

Suppliers have yet to report Q4 numbers, but Leopold said he expects calendar 2015 telco spending to drop 3% year-over-year, with cable TV capex growing 6% and web scale data center rising 10%.

European telecom giant Altice’s plans to squeeze $900 million in cost synergies from Cablevision Systems hit a bit of a speed bump after the U.S. cable operator released a financial forecast that calls for a nearly 4% rise in capital expenditures over the next four years.

Cablevision filed a proxy statement on Nov. 16 concerning its Altice merger, outlining revenue and cost projections for the next five years.

According to the proxy, Cablevision expects revenue to rise 6.4% between 2016 and 2019, and adjusted operating cash flow (AOCF) to grow 4.4% during that period, lower than some analyst expectations.

But the biggest surprise was on the capital expenditure line. Cablevision estimated capex would increase 3.6% from $908 million in 2016 to $941 million in 2019, which some analysts said could put a damper on Altice’s cost-cutting plans.

“This higher capex outlook is noteworthy given Altice’s expectation for $900 million in targeted cost savings ($150 million in capex), which we believe may hamper investment and impair long-term revenue growth,” Morgan Stanley media analyst Ben Swinburne said in a research note.

Altice agreed in September to purchase Cablevision in a cash and assumed debt transaction valued at $17.7 billion, or about $34.90 per share.

Key to the deal is Altice’s ability to extract cost savings from Cablevision, something it had done with great success in deals with French wireless company SFR and cable operator Numericable. But analysts and investors have been skeptical about synergies Altice chairman Patrick Drahi has said he could achieve.

Altice’s $900 million target is $100 million more than Charter Communications believes it can extract from Time Warner Cable, a company three times Cablevision’s size. Other analysts have said such extensive cost cuts would decimate customer service and plant maintenance.

For his part, Drahi has said he could achieve those savings by streamlining Cablevision’s network and eliminating high salaries. But, according to the proxy statement, several top executives stand to reap huge paydays if they don’t stay with the company after the deal.

And the decision by Cablevision’s controlling stockholders — the Dolan family, led by chairman and founder Charles and his son, CEO James — to receive cash instead of Altice stock has proven to be very smart. Altice stock, at 12.94 euros on Nov. 24 is down about 60% from its midsummer highs of about 33.16 euros. With more than 65.5 million Cablevision shares, the Dolans stand to reap about $2.3 billion.